Prepared and Well-Positioned

It's no secret that dramatic events in the financial markets placed tremendous pressure on financial companies in the fourth quarter of 2008. I want to assure you that your company was prepared to withstand the market downturn and is in very good position to adapt to the challenges ahead in this tough economy.

For financial security companies entrusted to help people reach their long-term goals, the most critical element to examine today is financial strength. Northwestern Mutual's financial position remains strong.

We entered 2008 with the second-highest capital position in our history. As equity values fell, many of our equity investments declined in value, but our diversified general account portfolio increased in size and remained concentrated in high-quality, fixed-income assets. At year end 2008, our surplus-to-reserves ratio of 11.5% was still high by historical standards — higher, in fact, than company surplus ratios in all but 13 of our 152 years. We also approved a policyowner dividend payout of more than $4.5 billion for 2009, a total that will again lead the life insurance industry.

In Northwestern Mutual's long history, we've navigated a variety of economic and financial conditions. In that time, our distinctive business model has set our company apart and gives us an advantage in the current environment. For example:

• We don't carry debt or other forms of financial leverage on our balance sheet.
   
• Our product mix is different from other companies in our industry. Our large block of stable, participating life insurance gives us sufficient margins to withstand significant market stresses and helps us continue to deliver the best long-term value to you.
   
• We're careful about embedding high-risk options, such as aggressive performance guarantees, in our insurance products and annuities because those guarantees can backfire in rough environments.
   
• We have substantial operating cash flow because of your high level of policy loyalty to your company. We call it "persistency." 

Last year Northwestern Mutual's strength among financial security companies helped us achieve a new record for recruiting financial representatives. More than 2,000 new representatives joined our field force in 2008 in recognition of the advantage that our business model and financial security commitment offer to clients in these difficult times.

With increased uncertainty in the financial markets and heightened sensitivity toward financial risks, we know that now, more than ever, you need to feel confident about your financial future. Northwestern Mutual stands strong to meet your needs. We want you and all policyowners and clients to be confident that your trust in us is well-placed.
 

Edward J. Zore
February 1, 2009

In the Face of the Economy’s Financial Tumult, Northwestern Mutual Remains Financially Strong

While some other financial companies have closed their doors, been acquired, or still struggle to survive, we are moving forward.

Why? In part, it’s because our approach to doing business differs fundamentally from many companies who have found themselves under siege. These differences keep us strong. And our strength is your financial security.

We know that, for many of you, our reputation for strength and stability attracted you to our company in the first place. We also know that we remain the keeper of your dreams. We work hard to keep earning your trust. It’s the foundation of how we operate, a responsibility that guides us.
 
Our approach to doing business differs fundamentally from many companies who have found themselves under siege. These differences keep us strong. And our strength is your financial security.

• Northwestern Mutual maintains a financial cushion, or surplus, that keeps us strong during market downturns.
  This is not to say we are immune from investment declines. Rather, it is to say that this cushion gives us flexibility and enables us to absorb market volatility.
   
• We don't need to borrow money to maintain our cash flow.
  Unlike other companies, we generate the cash flow we need to operate through our mix of business. Our cash flow helps preserve our financial strength and keeps us self-sufficient — so that we will be there when you need us.
   
• Our high-quality investment portfolio remains well-diversified.
  We invest in all major asset classes and market sectors. Unlike stock companies that must satisfy shareholders, as a mutual company we are not compelled to make risky decisions on the possibility of posting ever-higher returns each quarter. We seek investments that support your financial security over the long term.
   
• We prepare for tough times because we have lived through them before.
  Our company has endured the Civil War, the Crash of 1929, the Great Depression, two world wars, and nearly three dozen recessions. Our experience informs our strategies.
   
• We don't get caught up in gimmicks to sell our products.
  We don't use poorly structured minimum guarantees or too-clever options to attract insurance or annuity sales.
   
• We put the needs of our current clients first.
  We don't use dividend rates as ploys to attract new sales. Instead, we set our dividend rates so that we never jeopardize our promise to the 3.3 million policyowners who already depend on us.

For 2010, the expected dividend payout will be more than $4.7 billion, an increase of $200 million over its 2009 payout.

Doing the Right Thing Governs All We Do
The same philosophy applies to those who serve you on a personal level.

• Among the most highly credentialed in the industry, our financial representatives help you work toward complete financial security.
   
• They ask you to focus on faraway goals in the midst of the here-and-now.
   
• They encourage you to protect against life's unforeseen risks.
   
• They also guide you to invest for the long term — using a comparable approach to the one we take with our general account investment portfolio.
   
• They urge you to look into the future, recommending the right products and services at the right time.

These can be difficult conversations and difficult decisions. Yet they fall under the heading of doing the right thing. They safeguard your future.

What Clients Say

Read client comments and watch videos of interviews as clients talk about their experiences with Northwestern Mutual in building financial security.

Download the Client Stories

Watch Video of Curt & Tammy — Closing in on retirement and confident

"Our life, disability and long-term care insurance policies are the foundation of our financial well-being. The work we have done in investing gives us comfort. No matter how the markets fluctuate, we have our plan in place and are on a steady course."

Watch Video of Lonnie & Philomena — We're ready to retire: the rewards of diligent work

"Our rep, Frank, pressed us about all of our financial security needs over the years. Now, a few years away from retirement, we're ready — and all the sacrifices we made early on were worth it."

Watch Video of Kari and Clyde — Eyes on their financial future

"Katherine, our rep, is a great resource. We're living comfortably now, and we still feel secure in the future. She has worked with the children, teaching them about money and its value. She has worked with us and for us for 12 years now."

Watch Video of the Orr family — Growing the family business

"Our rep, Bob, reminded us that we have access to the cash value in our life insurance policy. We've borrowed on that asset three times. Our easy access to cash value enabled us to take advantage of opportunities we would have otherwise missed."

Watch Video of Mohan and Lalitha — Knowledgeable advice and promises realized

"Shahid, our rep, has worked with us at every stage in our lives. When we were younger we were naïve ... I credit Shahid with making us pay attention. Everything we have now we can attribute to the work we started back then."

Financial Strength

Our level of surplus remains very strong and is more than adequate to protect the company and its policyowners from future uncertainties. The company's ability to withstand the ongoing financial crisis is further enhanced by:

• A strong liquidity position.
• A lack of debt obligations or other use of financial leverage.
• The modest risk profile of its insurance products.
• The financial flexibility of the annual participating dividend decision made by its Board of Trustees.

We began 2008 with total surplus and asset valuation reserve (AVR) of $15.8 billion, a surplus ratio of 14.5% relative to general account insurance reserves.

During 2008, the equity markets took back a significant portion of the capital gains produced during the mid-1990s, as realized and unrealized capital losses reduced surplus and AVR. At year-end 2008, total surplus and AVR was $13.4 billion, with a surplus ratio of 11.5%.

Surplus provides the company and its policyowners with protection against the unexpected, while AVR supports a long-term investment strategy by cushioning surplus against market volatility.

Our Mutual Advantage
Northwestern Mutual is managed for the long-term benefits of its policyowners. This mutual perspective requires a balance between participating dividends and the long-term financial strength and security.

The dividend interest rate credited on most unborrowed life insurance funds will be 6.5% during 2009, down from 7.5% for each of the preceding four years.

In total, dividends to policyowners are estimated to be $4.6 billion during 2009, the third-highest payout in company history — and expected to remain the highest in the U.S. life insurance industry. This includes:

• More than $200 million in total dividends on individual disability insurance, a 29% increase over the prior year.
• Almost $83 million to be paid on term life policies.
• Almost $9 million in dividends paid to long-term care policyowners through our subsidiary Northwestern Long Term Care Insurance Company.

Investment Results
As a diversified investor, Northwestern Mutual was not immune to the adverse financial market events of 2008. Realized capital losses, net of taxes, were $4.1 billion. The company's investment guidelines limit exposure to any single asset class, industry or issuer.

The $79.3 billion bond portfolio remains the cornerstone of the general account investment strategy. This portfolio of public and private debt remained well-diversified and high quality, with 89% rated as investment grade at year-end 2008.

The company's $21.7 billion commercial mortgage loan portfolio, underwritten by the company's real estate field offices, had no delinquent, foreclosed or restructured loans.

Commercial mortgage loans remained well-diversified geographically and by collateral property type.
The aggregate ratio of amounts loaned to the market value of collateral properties was 66% at year-end 2008, a reflection of the loan portfolio's underlying credit strength.

While equity investments remain an important part of the company's long-term investment strategy, an additional measure of caution is appropriate in the near term. The company has reduced new investments in equity securities since mid-2008 but remains well-positioned with the surplus capacity and liquidity to participate in the eventual long-term recovery of the equity markets.

Northwestern Mutual strengthened its liquidity position during 2008, increasing its holdings to more than $25 billion in cash equivalents, U.S. Treasuries or government-guaranteed debt.
Our ample liquidity position, combined with significant positive cash flow from operations, provide the means to seize investment opportunities and to assure that the company will promptly meet all benefit obligations to policyowners and their beneficiaries.

Operating Results
Total revenue increased to $21.9 billion for 2008, a 3% increase from the prior year.

Premium revenue increased 2% to $13.6 billion and included growth for each of life, disability and long-term care insurance.

Net investment income increased 4% to $7.8 billion, primarily a reflection of portfolio growth, stable yields on fixed income investments and the high-quality credit profile of the bond and mortgage loan portfolios.

Benefits paid to policyowners or their beneficiaries totaled $6.1 billion during 2008, an increase of 10% from 2007.
Mortality and other claim experience remained favorable, a reflection of the company's careful assessment of insurance risk.

Commissions and home office expenses increased 3% during 2008, reflecting both sales growth in the company's core insurance products and the company's ongoing commitment to home office efficiency and cost control.
After provision for dividends to policyowners and a the one-time benefit of a tax reserve adjustment, net gain from operations for 2008 was more than $1.1 billion, an increase from $381 million in 2007, due primarily to the change in dividend scale for 2009.

Net income, which includes net realized capital gains and losses, was $483 million for 2008, a decrease from $1.0 billion in 2007.

Net realized capital losses during 2008 were due primarily to impairment adjustments, while realized capital gains during 2007 were primarily the result of gains on the sale of appreciated common stocks.

Policyowners' Examining Committee Report

Since 1907, a group of three to five policyowners has been given unrestricted access to the Company to independently evaluate operations, management and strategic plans. Each year, the Committee's findings are published in the Annual Report. Here is 2008 Committee's full report:

2008 Examining Committee Members

Lower center: John Balboni (chair), Senior Vice President, Information Technology and Chief Information Officer for International Paper Company, Memphis, Tennessee.

From left: Kenneth Macias, Founder and Chairman of Macias Gini & O'Connell LLP, Sacramento, California; Jeffrey Hayzlett, Chief Business Officer and Vice President, Chairman's Office, Eastman Kodak Company, Rochester, New York; Mary Ellen Stanek, Managing Director and Director of Asset Management, Robert W. Baird & Company, Inc., Milwaukee, Wisconsin; Michael Hayford, Senior Executive Vice President and Chief Operating Officer of Metavante Corporation, Milwaukee, Wisconsin

As representatives of the more than three million policyowners of Northwestern Mutual, we submit this report of our observations and recommendations. This process is unique in corporate America — to give an independent group of customers and owners full access to senior management, employees, financial representatives, field leadership and books of the Company. We appreciated this opportunity and hope that our contributions will support Northwestern in its mission to fulfill the financial security objectives of clients for many years to come.

This report is being published in Spring 2009, but our work started on September 29, 2008, when the Dow Jones Industrial average had its largest single-day fall ever of 777 points. The Fall of 2008 was a time when many companies — in particular, banks, investment firms and insurance companies — felt the impact of tightening credit, declining stock markets and a global economic slowdown. This led to unprecedented government intervention aimed at easing these tough economic conditions. We therefore began our work by investigating the Company's financial strength and response to market dynamics.

Financial and Economic Challenges
We believe the Company is strong, secure and in an enviable financial position. Northwestern Mutual entered 2008 with one of its strongest surplus positions in its 152-year history. Surplus can be thought of as assets set aside to protect against the unexpected, beyond the asset valuation reserve that provides a "cushion" against market volatility. In addition, the Company has very strong cash flow and liquidity that provide safety, flexibility and opportunity. Expenses are tightly managed. The mutual company structure enables the Company to take a longer-term approach to asset diversification and portfolio balance, with clear focus on what is in the best long-term interests of policyowners. Finally, the Company's teams of investment professionals have deep experience and tenure and are compensated on long-term rather than short-term results. All of these factors contribute to Northwestern having earned top ratings for financial strength from Fitch, Standard & Poor's, Moody's, and A.M. Best Company, the four key rating agencies for insurance companies.

We encourage the Company to be more vocal about the many reasons why existing and new policyowners should take comfort in Northwestern's strong financial position and excellent long-term value proposition. We also recommend the Company maintains a watchful eye on economic and regulatory developments as the financial situation continues to unfold.

Integrated Financial Security Strategy
In recent years, the Company made a strategic decision to pursue an integrated model of addressing its clients' financial security needs. The aim of this strategy is to help clients achieve a feeling of confidence that they will realize their financial security goals. The Company's strategy incorporates appropriate insurance solutions, along with investment solutions, as a client progresses through cycles of risk management, wealth accumulation, and wealth preservation/distribution. It is spearheaded by an exclusive field organization that develops meaningful long-term relationships with clients.

We found that the strategy is well-articulated and understood, and the Company is continuing its implementation. The field is committed to this focus on financial security and has embraced it as an important platform both for serving client needs and attracting and retaining high-quality financial representatives. Systems and development efforts are in alignment, and new metrics have been developed to track progress. Efforts are also underway to align compensation and incentives to support the strategy.

We have three recommendations about the strategy: First, continue to utilize metrics for individual departments and performers aligned with the enterprise; second, accelerate full implementation of support and customer reporting systems; and third, continue focus on the unique servicing needs of the transactional investment business.

Financial Network and Network Office of the Future
We believe the Company's sales arm, The Northwestern Mutual Financial Network, which operates through independently managed field offices, represents a key strategic asset. Northwestern Mutual representatives are highly productive, and the field offices are efficient. However, the number of full-time financial representatives has essentially remained level for over 10 years. Thus, the Company has embarked on an organic field growth strategy that includes adding greater numbers of financial representatives. This is supported by more second-line management and more significant Company investment in field office support — including revised field leadership contracts. We support this growth agenda as a driver of increased sales and therefore lower unit costs. Lower costs and healthy sustained sales revenue have provided and will continue to provide better financial value for all policyowners.

We observed that some new growth initiatives are already showing signs of success. For example, the new Practice Management Roadmap has great potential and should continue to be emphasized. We also encourage the Company to look at ways to provide more support to field staff to improve productivity for both representatives and clients. Finally, we believe the Company should explore opportunities to further leverage the Northwestern Mutual brand in local markets versus the local and Company brand.

Customer Centricity and Delivering the Integrated Strategy
We noted excellent progress in building out a service platform that supports the integrated Financial Security strategy. The Company is starting with the needs of the end client in mind: equipping financial representatives with tools and techniques to service their clients more efficiently and ensuring that representatives remain the primary service relationship providers. We were pleased to see the new Enterprise Operations team now functional and committed to "one" Northwestern Mutual, showing "one face" to the customer. As customers, we enjoyed seeing the vision for an integrated, consolidated statement that would show multiple product lines, as well as provide online viewing for clients. We recommend moving that work forward as quickly as possible, since we believe it will result in both better field efficiency and the ability to service a more complex client base. In addition, we encourage the exploration of a deeper self-service capability for clients that desire this approach. The development of self-service, however, must be consistent with the strong personal relationships developed and managed by financial representatives.

Human Capital and Leadership Development
With the accelerating pace of employee retirements and a new integrated business strategy, it is clear that our 152-year-old Company will continue to change. Northwestern has made good strides in strengthening its leadership development programs, implementing a thoughtful and thorough succession plan, and refining a clear process to identify future leaders. While we applaud the Company for these steps, we would like to see more prominence given to leadership growth and diversity of thought in the home office culture, which can produce even better solutions and outcomes. Within the field, we encourage a heightened commitment to gender, racial and ethnic diversity to help the Company better capitalize on the demographics of the communities it serves. In particular, we commend the Company for recognizing the growth and potential of the Hispanic segment as clients and financial representatives. We also believe there are opportunities to more tightly align home office leadership development programs with those of the field to cross-leverage best practices and enhance leadership growth.
Conclusion

The times in which Northwestern Mutual is operating can be characterized as turbulent, challenging and even chaotic. The competitive landscape is rapidly being reshaped. We certainly believe future generations will look back on 2008 and 2009 as historic in many ways. We felt reassured as policyowners that our trust in the Company is being honored by continued strong performance and a solid strategic plan for the future. We believe this financial strength can be leveraged even further. Even though the Company is navigating through difficult waters, we feel confident that Northwestern Mutual will continue to chart a successful course as The Policyowners' Company.